Demand bubbles and phantom orders in supply chains

Essay One The Impact of Shortages on Push-Pull Production Systems This paper explores the impact of endogenous customer demand on supply chain instability. It investigates how a semiconductor manufacturer's hybrid push-pull production system responds to customer demand, when inventory availability influences demand. While customers' response to variable service level represents an important concern in industry with sizable impacts on company profitability, previous models exploring supply chain instability do not address it. This research incorporates customer response in two important ways. First, a negative feedback loop of lost sales captures the effect that an initial increase (decrease) in demand leads to a decrease (increase) in the manufacturer's service level, causing customer demand to decrease (increase). Second, a positive feedback loop of production push characterizes the manufacturer increase (decrease) in capacity utilization to respond to a surge (drop) in demand, leading to high (low) production volumes and service levels, and a further increase (decrease) in demand. The manufacturer's hybrid push-pull production system is very effective in meeting customer demand. Stockouts at different stages in the supply chain, however, can shift the operation mode of the system to a defacto push system. The shift to a push system decreases the manufacturers' service level and increases demand variability. The analysis suggests that the endogenous customer demand assumption influences the shifts in modes of operation through the lost sales and production push loops, leading to higher supply chain instability than when customer demand is modeled as exogenous.